What is Convertible Term Life Insurance?

What is convertible term life insurance?

A convertible term life insurance policy means that it’s a term life insurance policy with the option to convert later on. This style of life insurance is available from many (but not all) Canadian life insurance companies, including PolicyMe.

• What is being converted? An existing term policy can be (optionally) converted into a permanent life policy. This means you get lifelong coverage, rather than coverage expiring at the end of your term.
• Do I have to convert if I have convertible term life insurance? No. Convertible just means that you have the option to convert if you want to. It’s not mandatory by any means.
• When can I convert it? It depends on the policy, but there’s a “conversion period” within which you’re allowed to convert. It’s usually up until a certain age (like 60 or 65) or while your term policy is still active.
• Will my premium stay the same? No, your premium will increase based on your current age when you convert to a permanent policy. However, it’s guaranteed coverage.

In simple terms, a convertible term life insurance is a smart way to get cheap term life insurance in Canada now with the flexibility to change your mind down the road if you need more coverage later.

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Is convertible the same as renewable?

No! A convertible policy means you can convert a term policy into a permanent policy. A renewable policy means you can renew your term coverage for another term policy when it expires — without a medical exam.

Why would you convert a term life insurance policy? 

You’d convert a term life insurance policy if your needs have changed since you bought the policy and you still need coverage.

When your term policy is nearing expiry, converting could make sense in these situations:

• You have health problems. Do you have new health issues that popped up during your term policy? Converting allows you to get a permanent policy with no new medical underwriting (i.e. guaranteed coverage) and level premiums.
• You have a lifelong dependent. Do you have a parent who depends on you financially, or a disabled child who will need lifelong care? Converting can get you a permanent policy to guarantee that your dependents have a payout that will take care of them when you pass.
• You have a complex estate. Do you anticipate probate fees and taxes when you die? Converting to a permanent policy is one way to cover final expenses like these.

When is converting a term life insurance policy not a good idea? 

For most Canadians, it’s not a good idea to convert a term life insurance policy. That’s true even if you still need coverage and you have the option.

Life insurance works by providing a payout to beneficiaries of your choice if you pass away while covered. 

When your dependents no longer need you and your debts are nearly paid off, the need for life insurance decreases. That’s why term insurance is so valuable — it covers you when you need protection, and then your coverage (and your premiums) stop.

You’d only really convert a term policy if you still need coverage and a new term policy would be prohibitively expensive or impossible based on your current health status.

What if you still need coverage when a term policy expires? You could choose to shop for a new policy instead of converting or renewing. This makes sense if you’re in good health when your current term life insurance expires — and it’s likely cheaper, too, since level term means fixed premiums.

Convertible term life insurance vs. permanent life insurance

The main differences between convertible term and permanent life insurance are:

• How long you’re covered
• How much you pay
• Flexibility

Convertible term policies are cheaper upfront and give policyholders flexibility to buy a permanent policy later if needed. Permanent life insurance policies charge higher premiums for life and you usually cannot adjust coverage levels without new underwriting.

If you know you want lifelong coverage, why wouldn’t you just get a permanent policy instead of a convertible term policy? Permanent life insurance is expensive. If it's something you really want, a convertible policy means you could get coverage now and potentially still get permanent coverage in the future when you're earning more money.

Buying a policy for the first time? Here’s a comparison:

Bottom line: A convertible term life insurance policy is a smart middle ground that gives you coverage now and choices in the future.

Example scenarios for policy conversion

Here are three examples to illustrate when policy conversion may or may not be a good idea. Every situation is unique, so make sure to consult a life insurance advisor or a financial planner before you decide.

Example 1: Converting term life insurance is a good idea

Anika bought a 20-year term policy at age 35 to cover her mortgage, but now expects to have permanent financial obligations to cover. She’s now 47 and was recently diagnosed with high blood pressure.

Anika decides that term conversion is the best choice for her family:

Why it’s a good idea: Anika is now guaranteed lifelong coverage without medical exams, which protects her dependents even if her health worsens. She locked in a lower premium by converting before her term policy expired, as premiums are based on age.

Example 2: Converting term life insurance isn’t a good idea

Andy bought a 15-year term policy when he was 25 to cover student loans. He is now a healthy and debt-free Canadian at 35 years old, with five years remaining on his term policy. He has a partner but they’re not married, and they rent separately.

Andy decides not to convert his term policy, buy a new term policy, or buy a permanent policy. He expects to let his term coverage expire in five years, unless something changes:

Why converting is not a good idea: Converting now would lock Andy into high premiums for coverage he doesn’t need for life. Without dependents or long-term financial obligations, he probably doesn’t need lifelong coverage and his money could grow faster in other investment vehicles.

Option 1: If Andy ends up marrying his partner or taking on a mortgage, then he could consider buying a new term policy when his current policy expires (so long as he remains healthy). 

Option 2: If Andy’s health seriously declines in the five years left on his term, he may want to consider converting to a permanent policy. This means higher life insurance premiums, but the death benefit can help cover his final costs if Andy doesn’t set aside enough money meanwhile. 

Example 3: Buying permanent life insurance over term life insurance is a good idea

Shauna is 40 and her 5-year-old has special needs and will need lifelong care. Shauna is saving for her own retirement and her current income is enough to care for the child. However, Shauna wants her dependent to have lifelong protection into adulthood, even after Shauna passes away.

Shauna decides to buy a permanent life insurance policy now instead of a term policy:

Why permanent is a good idea: Shauna knows her child will need care for life. A permanent policy ensures her child’s financial security no matter when Shauna dies. A term policy lasts only a set number of years, so if Shauna outlived her term the child would be unprotected. 

FAQ: Convertible term life insurance